Australian Bonds Flat Despite Weak U.S. Data

The Australian 10-year bond yield is unchanged on Tuesday despite weaker U.S. economic data which dampened expectations of further US rate rises. Moreover, U.S. Commerce Department in its report revealed that personal spending rose tad +0.1% m/m, revised +0.1% m/m reading seen in January (previous was +0.5% m/m). On the other hand, personal income rose +0.2% m/m in February, as compared to +0.5% m/m reading that occurred in January.

While in the early trading session, Australian government bond futures were a touch firmer, with the 3-year bond contract up 1 tick at 98.040. The 10-year contract rose half a tick to 97.4250, while the 20-year contract edged up 1 tick to 96.8550.

Apart from this, the Reserve Bank of Australia is set to release its third policy statement for 2016 on Tuesday, 5th April and is expected to leave the official cash rate at its record low of 2.00%, where it has been since May 2015. The RBA will monitor recent market disturbances, while keeping policy unchanged for the foreseeable future, but will stick with an easing bias.

Moreover, the RBA Governor Stevens in his latest comments said further cuts in interest rates remain on the table, but he must consider the longer-term risks of too low rates, i.e. the danger of excessive leverage. He also said that the real GDP growing at a slower pace and says easy monetary policy and lower AUD helping growth; therefore economy likely to expand at moderate pace.

We expect the central bank to lower its official cash rate in the future only if core inflation continues to move downward and if the economic growth statistics disappoint. Also, if unemployment and GDP growth fail to improve over the coming months, another cut will probably occur sooner rather than later.

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